Is It Time To Expand The FHA?

With interest rates up during the past few months has the time come to expand the FHA mortgage program?

Lower mortgage rates boost affordability and expand the pool of potential borrowers — precisely what’s needed in a real estate market which remains rickety and weak. But lower rates also have another value because when borrowers refinance to a lower rate they save money each month, money which can be spent on goods and services, thus boosting the economy in general.

In March 2012 HUD announced a new financing option for FHA borrowers: Refinance now and we’ll charge just 0.01 percent for the up-front mortgage insurance premium (UFMIP). For a $200,000 loan that’s a total of $20.

Save $3,000 Per Year

No less important, HUD also said borrowers who took advantage of the program would see their annual mortgage insurance rate reduced to .55 percent, a huge discount from pre-refinance rates.

“Currently,” said HUD, “3.4 million households with loans endorsed on or before May 31, 2009, pay more than a five percent annual interest rate on their FHA-insured mortgages. By refinancing through this streamlined process, it’s estimated that the average qualified FHA-insured borrower will save approximately $3,000 a year or $250 per month.”

You can see the problem: The streamline program announced by HUD is alluring — but only for those with an FHA loan insured on or before May 31, 2009. If you got your loan in June 2009 or later you can’t qualify.

The question that ought to be asked is how many additional households could be helped if the May 31, 2009 date was more flexible. Why is the date selected by HUD both sacred and rigid at a time when the housing market is improving but frail? If the idea is to assure that borrowers have had their mortgage for at least three years then why not just say FHA loans must be at least 36 months old to qualify?

Rob Chrisman, writing on MortgageNewsDaily, posted an email from a reader regarding the FHA streamline program and asked if “maybe someone can pass it along.”

Well, yes we can. Here’s the comment from Rob’s reader:

“Who made the decision of this date as a cut-off point, and why? Could it change in the future? We have piles of applicants with FHA’s interested in streamlines whose last loan closed in the 2nd half of 2009. Most of these borrowers have high rates and great credit. Every one of them has balked at the increase in insurance. Most are aware of the cutoff date, and none too happy. Why should a borrower who closed in July of 09 pay so much more than their neighbor who closed in May 09? The response I get from most in the industry is that it was made to avoid a rebate of UFMIP, which makes sense, but why wasn’t the date made a rolling 37 months to make more borrowers qualified as time passes? The same holds for Fannie Refi-Plus and Freddie.”

These are fair questions and suggest that HUD would be on good grounds to re-examine the current seasoning requirement.

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